Cryptocurrency: Virtual Currency, Real Risk

Cryptocurrency: Virtual Currency, Real Risk

Bitcoin is the most popular digital currency which is not owned by any organisation or a single person and is making waves in the investing world. While there remain several unanswered questions on the safety of the digital currency, Nikita Singh highlights the pros and cons of investing in Bitcoin.

Whole investing world is gripped by the phenomenon called "Bitcoin" and it is indeed creating interest among more and more investors and traders as its price touches the roof. What is a bitcoin? Does it have a future at all? How do I trade in bitcoin? What are the potential risks involved in trading or buying bitcoin?

WHAT IS CRYPTOCURRENCY? 

The term cryptocurrency is defines as 'currencies that can only be purchased or traded online'. These currencies, a hybrid of virtual money and sophisticated technology, operate beyond the clutches of oligarchic censorship and regulation. They are independent of any government entity and represent not completely anonymous, but unregulated, unmonitored and untraceable ways of instant monetary transactions with zero fees. These transactions are global and immediate.

The cryptocurrency proclaims to be an anarchical revolution in the face of other regulated world currencies, bypassing all the fees, regulations and delays associated with other currency transactions. These currencies also retain transaction security by enabling anonymous, irreversible and untraceable methods for online transfer of funds.

WHAT IS A BITCOIN? 

Bitcoin is the first cryptocurrency. It is an independent trust network of cryptographic currency enabling irreversible and unregulated transaction through blockchain technology.

HOW IT CAME INTO EXISTENCE? 

As the world economy came down crumbling in 2008, it uncovered a large number of flaws and failures in the traditional financial system. A lot of belief in the system was shaken and a lot of faith wore off. This acute decline in credibility was not the only strange phenomenon the world economy would be witness to; following the global recession of 2008, the first cryptographic currency was born, which was to later materialise into a thriving market. This was an answer to all the shortcomings of the traditional financial markets. This child of the ‘dark internet' named bitcoin, the first cryptocurrency and the first blockchain database, is the creation of an anonymous entity functioning under the pseudonym of Satoshi Nakamoto.

This revolutionary decentralised trust network that has seeped into the economy through bitcoin exchanges, bitcoin ATMs and a number of institutions opening up to cryptocurrency payments, has led to the creation of a dozen more similar cryptocurrencies such as ethereum, lisk, litecoin, iota, among others, in a short span of a few years. These currencies entered the markets for public purchase through initial coin offering, identical to the initial public offerings made by companies in the stock markets.

These cryptocurrencies are available through various cryptocurrency exchanges and applications around the world. India, which has of late become a thriving market for cryptocurrency investments with curiosity building around it as an alternate asset investment class, has applications such as zebpay, unocoin and coinsecure which have gained popularity among investors. While bitcoin wallets are gaining momentum in India, platforms enabling investments in other cryptocurrencies are yet to find a stable ground among Indian investors. At present, the most popular method to invest in alternate cryptocurrencies like ethereum and lisk is to purchase them using bitcoins, through platforms such as Changelly and Shapeshift, and the like.

2017 was a ground-breaking year for cryptocurrencies as the combined market value of all the cryptocurrencies, led especially by bitcoin and ethereum, surpassed $100 billion for the first time ever.

With rapidly increasing investments in cryptocurrencies, India Inc too is increasingly contributing to bringing this volatile currency into mainstream use. Some of the companies including Sapna Book House, bus ticketing portal eTravelSmart, fashion portal Fashiondiva.me, internet platform service provider Indsoft.net and Dharwad International School are accepting bitcoins as payments from their customers.

However, the multi-million dollar question still remains: Will this trust network of cryptocurrencies sustain? And for how long? While Indian banks such as ICICI Bank are beginning to use blockchain technology to gain an edge in digital banking, India's apex bank RBI has cautioned investors about bitcoin, keeping a sceptical stance on the matter. The central bank is not alone in expressing doubt over the cryptocurrency, business big-wig such as Jamie Dimon, CEO of JP Morgan Chase,is highly critical of its fidelity and has called the cryptocurrency a "fraud" and bubble that will "not end well".

If one expects blockchain, which is digital and decentralised ledger, to become the future of financial transactions, cryptocurrencies such as bitcoin has a sound future

WHAT IS BLOCKCHAIN TECHNOLOGY? 

Blockchain technology, developed at first for digital currency mining by Satoshi Nakamoto, is a complex technology made up of blocks that record transactions and allows digital information to be distributed but not copied. Blocks become a permanent part of the blockchain databases. This technology enables market participants to keep a track of the digital transactions without its central record keeping. This ingenious technology or computer infrastructures provide incredible advantages in terms of data storage and computational speed, thus finding use in other digital platforms as well. 

 On the front of cryptocurrency, the rigour and capability of the blockchains of a currency platform is said to determine the range of value addition in that cryptocurrency. The mining of cryptos are backed by blockchains, rendering gold, silver and government regulations of currencies of no use in this regard.

MINING OF CRYPTOCURRENCIES 

Cryptocurrencies are called ‘dark internet' or ‘another internet world' for the complexity attached to it. The mining of these currencies are done by solving long and complex mathematical equations when the coins are released. These mining require high computational powers and are often performed on super computers. The supply of coins to mine are made available for a very short period of time. In the case of bitcoin, according to its official site, the currency is mathematically limited to twenty one million bitcoins and cannot be changed.

Bitcoin is expected to be listed on the CME Group's future trading platform, which will improve its liquidity. This will facilitate new institutional money flowing into the digital asset and will help lower the volatility of this retail investor-driven asset.

With a limited supply of 21 million bitcoins as claimed by the currency, the growing demand of the bitcoins will continue to shoot up its price in the long run. Meanwhile, a relatively smaller number of investors transacting in the currency will keep its price volatile in the short term, according to the currency. Contrary to the claims of the revolutionary currency, the price of bitcoins or any other cryptocurrency is subjected a several other critical deciding factors such as government bans, crash in technology and scams to name a few.

DOES IT HAVE A FUTURE? 

Globally, investors are definitely excited about the potential for blockchain, the digital and decentralised ledger that records transaction without involving the financial intermediary like a bank. Given its security, most of the investors are excited about virtual currencies and believe that the future of peer-to-peer and business-to-business transactions lies in cryptocurrencies such as bitcoin and ethereum.

If you are a firm believer in digital currency and believe that the blockchain technology is here to stay, then you may think positively of the bitcoin and other trending cryptocurrencies. As more and more people find it easy and trustworthy to use bitcoins (cryptocurrencies), it will definitely gain popularity. 

 Whether the bitcoin prices will keep rising is a different question altogether and it can be the most difficult question to answer.

Bitcoin is the most recognised and trusted cryptocurrency currently available and is most widely used and accepted global digital currency. It has a limited supply and, as per the rule by the maker, only 21 million of bitcoins will be supplied. Looking at the demand for the digital currency and the gaining acceptance for the same with the limit on supply, the future does look bright for this cryptocurrency.

However, there are more than 1000 crypto currencies challenging the dominance of bitcoin and ethereum is one of them which experts believe has got superior underlying block chain technology. The value proposition that any cryptocurrency can offer is linked to its blockchain technology and whether or not it is scalable. The same blockchain technology is used by all cryptocurrencies with some additional relevant features which attempt to make the cryptocurrency more attractive for investors and users.

Apart from the fact that cryptocurrencies are not regulated and that they are not officially recognised by the central banks across the world, another risk an investor in bitcoin has to take is the very safety of the money or bitcoins. There have been instances of e-wallets being locked and also there was an instance of hacking, which led to loss of bitcoins. Suffice to say it is not 100 per cent safe.

While the future for cryptos such as bitcoin is bright, the price trend is almost impossible to predict. In fact, it may see another bout of volatile correction depending upon the news that comes from coin makers and the regulatory restrictions that may be imposed by several countries on speculative use of the digital currency. Bitcoin may easily cross the all-time high it made of $ 7875 and may even touch $ 10,000 anytime soon, but the amount of volatility and uncertainty involved in trading bitcoins can scare the best of risk traders. The digital currency is tradable 24/7 and does not sleep.

If one is serious about trading or investing in cryptocurrencies, the way to go about can be having a diversified portfolio of cryptos with higher weightages for bitcoin and ethereum and minimal weightages for other emerging crypto currencies. To choose which crypto currency to invest in, one has to study the underlying blockchain technology and see if it is superior to others, and also check if some of the recognised companies and institutions are accepting the cryptocurrencies. Wider the acceptance, lower the risk in investing in a cryptocurrency.

CONCLUSION:- Any investor who will study the history of asset prices going back to 100 years will find that equity has been the most consistent asset class to have also delivery high returns. Since the emergence of cryptocurrencies in 2009 Bitcoin has grabbed lot of speculators attention and has indeed been a phenomenal performer. Given the nature of the cryptocurrencies in general and bitcoin in particular it is almost impossible to fundamentally value the digital asset. As everyday there are numerous cryptos emerging and coming out with ICOs (Initial Coin Offerings) the competition for Bitcoin will always be there, the dynamics of which may impact the prices of bitcoins negatively. The prices of bitcoin as a digital asset are behaving as if they are in a bubble territory. The digital currency to start with is not legit and possess many unknown risks.

Pure traders who are master exponent of technical analysis and are risk takers may dabble with the most popular cryptocurrency however for value investors Bitcoins and other cryptocurrencies at best should be avoided. It does not make sense to park your hard-earned money in to something that you don't understand completely and definitely involves considerable amount of contingent risks.

Traditional institutional investors have so far avoided investing into cryptocurrencies and only time will tell if they do participate in the digital asset that is making headline. It may well turn out to be a game changer for the digital asset once institutional players start placing bet on the asset as it will for surely reduce the volatility in the prices and also there will be increased liquidity in the system for the risky asset that it is. It does look like the future for the cryptocurrency will depend on blockchain technology innovation and fintech integration.